Poland's macro stability in medium-term more at risk due to high rates than strong PLN (interview)

"The strong zloty in itself is not the main problem at the moment, it is part of the jigsaw puzzle of threats to macro stability in the medium term, in which the high level of interest rates is beginning to play an important role," Bujak assessed.

"High rates have a negative impact on this stability not only through the exchange rate channel, but also directly, as they hinder the financing of investments necessary for the modernisation of the Polish economy and the reconstruction of its development model, e.g. in terms of energy transition, but also improving productivity and changing the structure of the economy," he added.

Poland's largest lender by assets PKO BP chief economist assessed that if rates were lower in the medium term, it would be easier to finance the necessary modernisation investments.

"This is also important for the implementation of costly arms investments," he pointed out.

"As for the zloty, in addition to affecting the profitability of exports, its strength means greater substitution of domestic goods with imported goods or services, which worsens the trade balance and the current account balance of the balance of payments. This, in turn, has a negative impact on the so-called external position of the country, which is one of the key parameters, along with inflation and the fiscal balance, determining the assessment of the macroeconomic stability of a given economy, which is watched, for example, by rating agencies," Bujak added.

The economist said that he understands that extremely restrictive monetary policy will make it easier to meet the inflation target over this current horizon, but pointed out that it may be worth paying the price in the form of slightly elevated inflation now and over a horizon of 1-2 years, so that it is with greater certainty closer to the target over a horizon of 3-5 years.

Bujak stressed that he does not mean to say that interest rates should already be cut now, because, given the management of inflation expectations, it would be difficult to justify this when current inflation is rising and even with the caveat that monetary policy should be guided by the outlook for inflation in the medium term and not by its current readings.

He also pointed out that there could also be controversy in the political context, as before when rates were cut before the last election.

"But it is already possible to slowly prepare the central bank's communication that we should think about the resumption of interest rate cuts in the near term, given the widely forecast decline in inflation within the limits of acceptable deviations from the target, even core inflation itself, which is also shown by the Poland's projection for the next 2-3 years," Bujak assessed.

tus/ ao/ nl/